02.13.2023 | Posted by Erik
What Could Happen in the Event of a Recession
Massive layoffs continue to rock Silicon Valley. From Microsoft and Google to Meta, Lyft, Amazon, and more, over 120,000 tech employees have been let go in the last year. And while this may seem like an insular industry issue, many experts fear it’s a signal that something worse is coming.
While inflation rates have cooled a bit, many economists still fear we’re headed toward a recession. No one really knows whether a recession will happen, but it never hurts to prepare for the worst and protect your company.
So, what can you expect if a recession hits? How can you prepare? We tapped our outsourced AR management team to break it all down.
5 Things to Expect If a Recession Happens
We looked at our data from the last recession (in 2008) and recognized several trends. We’re applying those insights to give you an idea of five things you can expect if a recession occurs — and how to combat them.
1. Slower Payments
According to our internal data, in the 2008 recession, payments came in a lot slower. On average, the days outstanding (DSO) increased by five to seven days. In other words, our outsourced accounts receivables customers got paid about a week slower (on average) than they did before the recession. If a recession hits, expect your payments to trickle in a bit slower.
How to keep your company protected:
- Stay up to date on your collections. As an outsourced accounts receivables firm, we talk about this one a lot. But the last thing you want to do is enter a recession with a bunch of past-due accounts. Instead, stay on top of your collections and keep reaching out when your customers are past due.
- Consider holding orders as leverage when customers are past due. If the recession comes and people stop paying, it’s wise to hold back products or services until you receive payments. Of course, you don’t want this to be your first action. If they’re still making payments or trying to get caught up, don’t drop the hammer on them right away. Instead, wait at least 30 days (or so) to start using leverage of this kind.
2. Bad Debt
When recessions happen, it’s expected that more businesses will fall into debt and even declare bankruptcy. The companies that are paying you slowly now are most likely to be at risk in the future.
How to keep your company protected:
- Take time to review your credit investigation policies and update them as needed. For example, you might need stricter policies or more frequent checks if the economy takes a negative turn.
- Make sure your current customers’ credit files are up to date. If you run into issues and need to send a customer to collections, you want to ensure you have all the information you need.
- Reduce credit lines and keep customers current on payments. Sometimes it helps to “give a little to get a little.” For example, you might require your customers to pay some or all of their past due amounts before shipping more product. Even if a customer offers to pay in advance for a new order, this doesn’t help reduce their amount owed or help clear past dues, so it isn’t advisable. Your primary goal should be to reduce exposure from outstanding invoices. We recommend only allowing advance payments when a customer’s credit line is full, and their balance is current.
3. Increase in Accounts Placed for Collection
You should expect to send more accounts into collections as times get tough. No matter how amazing your customers are or how prepared you might be, the smart move is to be ready to send customers to collections when needed.
How to keep your company protected:
1. Put a policy in place for collections now. Choose a collection agency or an outsourced AR management firm and set up a process for turning accounts over. Of course, sending to collections should only be used as a last resort, as it’s highly unlikely that you’ll be able to continue doing business with a company placed for collections. Keep in mind that you don’t want to wait too long before transferring them over. We’ve found that if you wait longer than 90 days, your chances of collecting diminish significantly. Still, make the decision with caution as there’s no going back once you send to collections. Find the sweet spot that makes sense for your business and develop a process around it.
2. Consider putting a company policy in place regarding reporting to the credit bureaus. Stating that it’s policy to report any customer if their past due’s go beyond 90 days or when an account is placed for collections is useful leverage to compel a customer to pay. If they still don’t pay, then make sure to follow through and report them to Dunn & Bradstreet and Experian. Having a bad mark on their credit could be enough to get them back on track again.
4. Potential for Layoffs
There’s a potential for layoffs in your company and your customers’ companies. As a result, the AP could be wearing many hats, causing an increase in skipped invoices and delays. In addition, layoffs in your company could result in losing some of your crucial AR people.
How to keep your company protected:
- Keep tabs on employment status at your customers’ companies. Check in frequently to make sure you always know who the best point of contact is for all your customers. Make sure to document as many A/P contacts at the company as possible. This way, if your main contact leaves, you’re more likely to have another person at the company you can easily get in touch with.
- Take time to document all your AR processes so others can fill in if layoffs happen at your company. You don’t want to be left not knowing how to keep your collections running smoothly.
5. Impact on Sales
Expect a recession to have some impact on sales. For most businesses, recessions bring a drop in sales. However, for counter-cyclical companies, it could bring a boom. Examples of counter-cyclical companies include collections agencies, second-tier lenders, discount retailers, and others.
You should know how a downturn will impact your business, and get prepared now.
How to keep your company protected:
- If you expect sales to drop, consider cutting costs now, putting money aside, and making plans for tougher times.
- If you think a recession could increase your sales, make sure you have the infrastructure in place for growth.
4 Bonus Tips to Prepare for a Potential Recession
Now that we’ve discussed what to expect and how to keep your company protected, let’s review some other best practices from our outsourced accounts receivables experts.
- Be wary of taking new customers and orders when things are tough. If a company shows up out of nowhere to do business when business has been slow, be sure to do your due diligence before working together. In other words, don’t just take any order when business is scarce. You never know how or why they’re coming to you. It could be because they stopped paying their last vendor.
- Take extra precautions with giant orders. We can’t stress it enough: do your due diligence, especially if a large order could mean more expenses for you. For example, suppose a new customer shows up and orders a large enough quantity that it directly impacts your bottom line. In that case, you’ll want to ensure you run a thorough credit investigation first. Don’t give one unproven customer the power to make or break your business.
- Perform credit checks and/or reference checks. As the saying goes, “Desperate people do desperate things.” A recession isn’t the time to rely on trust indicators. Instead, make sure you call references or run credit checks on every new customer.
- Build a relationship with a collection agency. There’s no harm in getting set up with a collection agency or an outsourced AR management firm If you have time now, doing paperwork and setting up a transfer process now could mean a quicker turnover later.
Read more: AR fundamentals to protect your company in good and bad times.
Set Yourself Up for Success Today
Being proactive today could be just what your business needs to ride the waves of a potential recession. Ultimately, keeping your information and payments up to date and following some best practices down the road can help keep your business running smoothly.
If you want to get ahead of the curve and get your accounts receivables in shape today, we can help.
At Axim, we’re experts in customer-centric outsourced AR management. We specialize in getting you paid while keeping your relationships intact. Additionally, we already have existing processes and relationships with collection agencies in place, so you’re prepared for whatever may come.